Month: May 2017

Credit deceleration in Australia should be ringing alarm bells – April 2017

Today, the RBA released its Lending and Credit Aggregates showing that growth in new credit (total private sector) in Australia has continued to slow in the latest month. In April 2017, the annual growth in new private sector credit declined by -$29.8b. In other words, there was $29.8b LESS private credit growth in the year to April 2017 than in the year prior. This doesn’t mean that the stock of outstanding credit is declining (that would be deleveraging), at this stage it means that credit growth has been slowing.

New credit, together with income growth, drives new spending in the economy.

With regulators and media (rightly) focused on reigning in the riskier mortgage credit, namely interest-only mortgages, there has been absolutely no focus on the worsening state of business credit growth. I work on the premise that business spending and investment supports future economic growth and improvements in labour market conditions. So, when I see a chart that shows business credit continuing to decelerate, then it makes me rethink my expectations for economic and employment growth.

The main driver of the slowdown in overall private sector growth in new credit has been the decline in new credit for business. Not even the acceleration in investment mortgage credit has been enough to drive the overall impulse higher, with total annual growth in new credit for mortgages only reaching +$7b in April:-

Source: RBA, The Macroeconomic Project

A longer term perspective highlights just where we are in this cycle, and it’s not good.

In dollar terms, the overall annual decline in new private credit is now larger than it was in the previous downturn of 2012/13. At that point in the cycle, the annual decline in new credit reached -$28.9b at its lowest point. As a % of GDP, it was approx. -1.9% of GDP in size. Although the current dollar amount is slightly larger, -$29.8b, it’s also a slightly smaller % of GDP about -1.7% of GDP (using a rosy GDP forecast).

Source: RBA, The Macroeconomic Project

Remember why credit growth started to accelerate again in 2013? A series of eight (8) official cash rate cuts by the RBA between Nov 2011 and Aug 2013 (-225bps in total) and the acceleration of Chinese credit growth. New credit growth started to accelerate for both business and mortgage credit. Which is why it’s surprising not to see more commentary about the slowing growth in business lending in this part of the cycle.

The annual growth in new credit for business started decelerating back in mid-2016. In dollar terms, the level of deceleration has surpassed the low of 2013. But as a % of GDP, the current annual decline in new credit for business is just shy of that post-GFC low, -2.02% in April 2017 versus -2.14% in June 2013.

Source: RBA, The Macroeconomic Project

In recent posts on this topic, I’ve given this deceleration in business credit growth the benefit of the doubt. The improvement in business profits (led by Mining) over the last few quarters may have cushioned some of this slowdown in new credit growth. But with commodity prices now off again and with consumer spending and labour market metrics looking lackluster, it’s not likely that we’ll see continued high growth in business profits. So without growth in new credit, what will be supporting at least more stable economic growth? We’ve seen hours worked grow by a mere +0.07% in the first quarter of the year (in the Dec quarter aggregate hours worked grew by +0.46%), indicating that activity may be slowing.

Despite the picture I’ve painted here, business sentiment and reported business conditions indices are at multi-year highs. It’s difficult to explain the disparity between improving business confidence & reported conditions and the slowing growth in new credit for business. I would have thought that improving business confidence would translate into decisions to invest and spend. But even the NAB survey for the month of April has a rather large pull back in capex:-

Source: NAB

Maybe business was waiting on the budget outcome in May. Either way, this ‘optimism’ hasn’t translated into better labour market conditions – underemployment continues to rise, unemployment remains elevated and growth in aggregate hours worked is flat.

And in the irony of all ironies, the one area where regulators are focusing efforts to slow lending, investor mortgages, the growth in new credit continues to accelerate. The annual growth in new credit for total mortgages of +$7.6b is the product of 1) continued deceleration in owner occupier credit (-$31b annual decline in new credit) and 2) the continued acceleration of investor lending from +$33b in March to +$38.9b annual growth in April. We are yet to see any slow-down in investor-led activity reflected in the data. Most measures to curb interest only lending only started to come into effect during April.

Whilst it’s the right idea to reign in riskier interest-only lending, know that this is going to happen now against a backdrop of slowing annual new credit growth across the board – business, owner-occupier mortgages and personal credit. Slowing our rate of debt growth isn’t a bad thing, but it comes at a price when economic output growth relies so heavily on accelerating credit growth.

New credit, together with income growth, drives new spending in the economy.